Issue #29                                                                                                 June 2021
Lessons About Corporate Governance from Venture Capital-Backed Companies
by Professor Rob Johnson

Directors of corporate boards can learn something about corporate governance from observing how the boards of venture capital-backed companies operate. Venture capitalists have to focus intensely on the things that will make the most difference in creating value because so few start-ups actually succeed. Only with the proper focus by their company boards on building value can they nurture the winners that will ultimately make the difference in a successful venture capital portfolio.

To put this in perspective, one must first define the board of directors’ key responsibilities. As Geoff Unwin, board director of several listed companies, suggests, the role of the board is three-fold: (1) to protect the values of the company through good governance; (2) to ensure that the company has the right strategy; and (3) to ensure that the CEO and executive team is the right team to execute that strategy. Yet boards often get so involved in dealing with regulatory issues and financial matters that they overlook, or simply don't find the time, to focus on some of the key matters implicit in Unwin's definition. 

In venture capital-backed companies, however, this problem is less prevalent – not because those same issues don't exist, but because the scope of corporate governance in such companies is inherently much more focused. Of course, it helps that boards of venture-backed companies are representing just one shareholder or a small handful of shareholders and are not forced by public markets to focus on short-term results. Yet there is more to it than that.

As a rule, in a start-up or early-stage company, venture capitalists back the entrepreneur as much as the business idea. It is often said that given a choice between a grade A business idea with a grade B entrepreneur or a grade B business idea with a grade A entrepreneur, the experienced venture capitalist will almost always choose the latter.  This means that, from the start, the venture capitalist has already made a judgment about the third element in Unwin's formula – backing the right entrepreneur to lead the company. In many instances, the board will need to spend time ensuring that the CEO has the right supporting team, but the leadership is set early on.

Addressing Unwin's first point, the values of a start-up or early-stage company are a direct reflection of the values of the founder/CEO. Think Steve Jobs or Jeff Bezos or Elon Musk.  Thus, as long as the other directors agree that those values are sound, the congruity between the founder/CEO and the rest of the board provides a sound basis for dealing with governance matters, which is a huge step forward for any board.

That then leaves the second element – the right strategy – for the board to focus the majority of its energies on. And, indeed, that is where boards of venture-backed companies spend the most time. Of course, situations change and boards must continuously assess and deal with issues that affect each of Unwin's three planks, including those instances when the management challenges of sustaining high growth mean that a founder is no longer the right person to continue leading the company. Nonetheless, after dealing with such issues, the main focus of the venture-backed board ultimately always returns to the important strategic issues. The quality of the strategy discussions at the board level is key.

​​​​​Rob Johnson 
Visiting Professor of Strategic Management
IESE Business School

Upcoming: IESE-ECGI Corporate Governance Conference 

Boards of Directors and Corporate Strategy in an Uncertain Context"
Online, October 4-5, 2021 

Corporate strategy is considered a central driver of the firm’s long-term orientation. Corporate governance suggests that boards of directors have the duty to govern the firm and develop it sustainably for the long term. This implies that boards are supposed to discuss the firm’s strategy and make relevant decisions on corporate strategy.

In dealing with strategy, boards face a slew of challenges. Board directors need to understand the company's business and make complex strategic decisions concerning issues such as digital transformation, decarbonization, or corporate restructuring in an increasingly uncertain context.

The IESE-ECGI Corporate Governance Conference 2021 aims to shed light on these issues. The IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) will bring together leading scholars from the areas of corporate strategy, corporate finance and organizational economics, as well as CEOs and chair persons from top-tier companies. Confirmed speakers include: Renée Adams, Oxford University; Jay Barney, University of Utah; Marco Becht, Université libre de Bruxelles and ECGI; Jordi Canals, IESE Business School; Sophie L'Hélias, Chair of LeaderXXchange and co-Founder of ICGN; José Manuel Entrecanales, Chair and CEO of ACCIONA; Bengt Holmström, MIT. Nobel Laureate in Economics; Ioannis Ioannou, London Business School; Juvencio Maeztu, Deputy CEO and CFO of Ingka (IKEA); Tobias Martinez, CEO of Cellnex Telecom; Marc Puig, Chair and CEO of Puig; Jean-Pascal Tricoire, Chair and CEO of Schneider Electric; Margarethe F. Wiersema, University of California, Irvine. 

The conference will take place on October 4-5, 2021, 13:30-19:00 (CET). It will include five sessions where a distinguished scholar will present a paper, followed by a discussion. There will also be two sessions with CEOs and chair persons to discuss the role of boards in corporate strategy.

If you have not registered yet, you are welcome to do so here

Corporate Governance News

EU rules require large companies to publish regular reports on the social and environmental impacts of their activities
Directive 2014/95/EUD – also called the Non-Financial Reporting Directive (NFRD) – lays down the rules on disclosure of non-financial and diversity information by certain large companies. The proposal would significantly expand the scope of ESG reporting by companies operating in Europe since it applies to EU-listed companies, and other companies operating in the EU that are “large”… read more ​
Europe's major banks link exec pay to diversity targets as trend gains momentum
Nearly all of Europe's major banks are now linking executive pay to diversity and inclusion targets, S&P Global Market Intelligence data shows. Adopting diversity targets in executive pay evaluations is "important, because ultimately, the things that you use to determine pay are a really strong indication of the things that you're saying are important strategically," says Katy Bennett, a director focused on diversity and inclusion in financial services at PricewaterhouseCoopers. But getting those targets right is the hard part… read more
Thought Leadership: Exxon board ouster marks tipping point for investor climate engagement
Exxon Mobil shareholders recently voted to replace three board members with directors proposed by a small activist investor group known as Engine No. 1. The group claimed Exxon was not moving fast enough to address climate change and that the board needed a fresh perspective to speed things up… read more ​​​​​
Corporate governance reform can help drive long-term value in Asia-Pacific
Corporate governance is becoming a hot-button topic among investors, governments and companies in Asia-Pacific. Regulators and companies in the region are seeking to ensure that all stakeholders, including company management teams and shareholders, are on the same page, with the goal of creating long-term value. The right talent, technology and transparency are needed to improve corporate governance, new research finds… read more ​​​​​
Solving the puzzle of climate risk reporting
Sustainable business practices have risen to the forefront of global concerns. As climate finance expands into the mainstream, it’s vital that investors and other stakeholders understand how a company measures and monitors these targets. The job is daunting, but it will have a huge impact on the future of doing business… read more ​​​​​
SEC announces latest amendments to proxy advisor rules will not be enforced, pending additional review
The new chairman of the SEC released a statement on June 1, 2021, directing SEC staff to consider revisiting its interpretation and guidance from September 2019 regarding the application of the proxy rules to proxy advisors (the 2019 Guidance), and the amendments that it adopted in July 2020 (the 2020 Amendments)… read more ​​​​​
Corporate ESG reporting remains patchy – report
Corporate disclosure of ESG information is getting better, “but progress will remain patchy and haphazard as long as it remains voluntary,” according to a Morningstar report released Wednesday… read more ​​​​​
The debate over dual-class shares in the UK
The principle of “one share, one vote” is long cherished by the UK investment community. Under current Financial Conduct Authority (FCA) rules, companies cannot be included on the London Stock Exchange (LSE) and key indexes such as the FTSE 100. But London’s struggle to attract IPOs has forced a rethink. A government-commissioned review has proposed relaxing the rules around dual-class shares. The hope is to lure fast-growing, entrepreneur-led companies that want to tap the public markets without giving up control​​read more ​​​​​

In Case You're Interested...

Trust: A Critical Asset

The responsibilities of boards of directors continue to evolve and increase. In addition to perennial topics such as strategy, succession, financial reporting, compliance, and culture, boards are experiencing broader demands on their oversight from expanding stakeholder and shareholder considerations. The growth in the number and complexity of board responsibilities is taking place in an environment of growing skepticism towards our various institutions. Against that background, companies and their boards can help to address these multiple challenges by considering one of the most critical assets not on their balance sheets―trust... read more

Institutional Investor Survey 2021

Morrow Sodali has published its sixth annual Institutional Investor Survey (IIS), which canvasses the views and opinions of more than a quarter of the world’s assets under management at a globally significant point in time… read more ​​​​​

What does green mean? Investors grapple with definitions and data

Coming up with accurate data on companies’ environmental, social and governance records has always been difficult for investors. Demand for so-called ESG funds may be high, but understanding where the green capital should flow is not always obvious. The problem is most often a lack of meaningful, reliable data… read more ​​​​​

How should companies decide on their ESG goals?

In the fourth-quarter earnings calls for 2020, more than one in four S&P 500 companies discussed environmental, social and governance (ESG) objectives. But should companies be involved in ESG? And, if so, how should they decide the type and the level of their involvement? There is a very simple answer: they should embrace these objectives whenever it is good for business. And when they would negatively affect the bottom line, companies should ask their shareholders how much of their profit to sacrifice — and for which objectives… read more ​​​​​

What stakeholder capitalism can learn from Jensen and Meckling

Jensen and Meckling’s 1976 article is an academic classic, but heavily criticized by stakeholder capitalists for arguing that corporate structures should be designed to maximize short-term profit. In fact, a careful reading of their article uncovers quite a different conclusion… read more ​​​​​

The SEC Has Broad Authority to Require Climate and Other ESG Disclosures

Increasing demand for companies to provide enhanced disclosures on climate-related and other environmental, social, and governance matters has raised questions about the Securities and Exchange Commission’s authority to require disclosures. That authority is broad and not limited to materiality… read more ​​​​​

The Director’s Guide to Shareholder Activism

The COVID-19 crisis has left its mark on all aspects of society and business. Shareholder activism is no exception. In 2020, activists targeted fewer companies and put less capital to work in their campaigns as the pandemic roiled financial markets and sparked a deep economic recession. But there is ample evidence of a resurgence in 2021. What do boards of directors need to know to navigate this environment?… read more ​​​​​

The role of boards in fostering resilience 

Boards of directors play a critical role in ensuring that management is well-prepared for a wide range of potential shocks. In the fourth episode of McKinsey’s series on board perspectives around the most important issues facing organizations, McKinsey looks at the role that boards play in building resilient companies… read more ​​​​​

What Corporate Boards Can Learn from Boeing’s Mistakes

Board members have an incredibly difficult job. On average they spend between 250 to 350 hours a year advising the company, and they must understand the manifold issues management is dealing with, as well as the industry and global context. When they fail at these duties, the consequences, including public outrage, can be immense, as we’re seeing in a shareholder lawsuit against Boeing. The suit offers five main lessons for companies and board members: 1) Hire board members for competence and objectivity; 2) Ensure that the board structure aligns with industry needs; 3) Prepare for the worst; 4) Manage for truth and realism; and 5) Practice accountability and punish wrongdoing… read more ​​​​​

IESE's Recent Research on Corporate Governance 

“The Big Three and corporate carbon emissions around the world”

Journal article (May 2021)

Authors: José Azar, Miguel Duro, Igor Kadach, Gaizka Ormazabal
Journal: Journal of Financial Economics
Read more

“General Equilibrium Oligopoly and Ownership Structure”

Journal article (May 2021)

Authors: José Azar, Xavier Vives
Journal: Econometrica
Read more

“The Impact of Logic (In)Compatibility: Green Investing, State Policy, and Corporate Environmental Performance”

Journal article (May 2021)

Authors: Yan Shipeng, John Almandoz, Fabrizio Ferraro
Journal: Administrative Science Quarterly
Read more

“Ingka in 2020. Corporate Governance, Purpose and Transformation”

Case-study (2021)

Authors: Masclans, R., Canals, J.
Journal: IESE, SM-1698-E
Read more

Upcoming Program

Executive Program: “Consejos de Administración Responsables”

Date: March 21, 22, and 23, 2022

Location: IESE, Madrid Campus

Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 23-26, 2022

Location: IESE, Barcelona Campus

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